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Now that both political parties have held their respective conventions, the campaign season is shifting into high gear. As a citizen, you’ll want to hear how the candidates plan to address issues of importance to you. But as an investor, you might be particularly interested in how the election results can affect your investments. Based on what happens on November 4, should you make any changes to your portfolio?
To answer that question, you may find it useful to review the history of the financial markets under different political scenarios, according to Ned Davis Research.
Since 1901, the Dow Jones Industrial Average has shown an average annualized return of about 12 percent under Democratic presidents, compared to about 8 percent under Republicans. When Democrats have controlled Congress, the Dow’s average annualized return has been about 11 percent, compared to about 8 percent when the Republicans were in control.Since 1925, long-term government bonds have returned more than 7 percent under Republican presidents, compared to about 3.4 percent under Democrats. When Republicans have controlled Congress, the bond market also fared better than when Democrats were in charge, though the difference isn’t as pronounced as in the comparison between presidents of different parties.
But while it’s interesting to study the past, it’s not necessarily instructive about the future. It’s true that by changing our tax laws, government spending and industry regulations, any given president and Congress can have an impact on economic growth, jobs, interest rates and inflation — and all these factors, in turn, can affect the financial markets.
Still, it’s impossible to predict just how these forces will influence the investment world. Political candidates often make promises that never turn into reality, and even if they do, they can have unintended consequences.
Even more importantly, however, is the fact that the free-market forces of our capitalistic system are likely more powerful than political forces in determining the ultimate performance of investments.
As a country, we have experienced many political changes and upheavals, but, over time, our economy has always proven resilient enough to provide opportunities for those people with the faith to invest for the future.Here’s the bottom line: No matter who wins the presidency in November, and no matter which party controls Congress, you don’t need to change your investment style or revamp your portfolio.
Of course, that doesn’t mean you should be oblivious to new policies and their potential impact on your investments. In fact, it’s a good idea to review your portfolio at least once a year with your financial advisor, who can recommend any changes that might be beneficial.
So, when it’s time to cast your ballot, support the candidate who best advocates your concerns on a range of issues. But when it comes to your portfolio, make sure to “vote” for investment strategies, such as buying quality stocks and bonds, holding them for the long term and building an investment mix based on your goals and risk tolerance.
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